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Establishing a Baseline Price

4:02 with Pasan Premaratne

Before you can pick a pricing method, you need to understand what goes into a price. A good price should reflect your costs, skill level and desired profit. Let’s go over how we can calculate such a price.

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Formula for calculating your hourly rate:

- Calculate your direct and indirect expenses

Annual expenses = Sum of:

Rent
Utilities
Insurance
Employee salaries and benefits
Advertising and promotion
Outside professional services
Equipment
Office supplies
Business taxes
Client services

and any other expenses

- Calculate number of working hours

Working hours = (Number of working days a year - holidays - vacation time) * Number of hours worked per day

- Calculate hourly rate:

Hourly rate = (Annual Expenses + Profit Margin) / Number of working hours

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[Pasan Premaratne] Regardless of the pricing method you go for, you have to establish a baseline. 0:00

The price you charge for a project should be enough to cover your expenses, billable work hours, and bring in some profit. 0:04

Rather than just picking a random starting figure because it's what other people in the industry charge, 0:12

calculating the best rate for you will allow you to accurately evaluate your financial progress. 0:17

To calculate an hourly rate, start by totaling all direct and indirect expenses for the year. 0:23

This includes things like rent, utilities, insurance, employee salaries & benefits, advertising & promotion, 0:30

outside professional services, equipment, office supplies, business taxes, and client services. 0:37

Next figure out the number of hours you plan to work in a year. 0:44

Start by calculating the total number of days you want to work and the number of hours per day. 0:48

If you're sticking to a 9-5 schedule, 5 days a week, that's roughly 251 working days a year—taking into account holidays and weekends. 0:54

If you want to work 4 days a week, that's perfectly fine as well. You are in charge of your own schedule. 1:03

Deduct any planned vacation time or time outside the business from this total, 1:08

and you have a rough idea of the number of hours you will work during the year. 1:13

Add to your total expenses a reasonable profit margin—usually anywhere between 10-15%. 1:18

Divide this figure by the number of hours you plan on working. 1:25

This resulting hourly rate should cover all the costs of running your own business, including your own salary. 1:29

Say your annual expenses are around $72,000. You add a 10% profit margin of $7,200.¾ 1:35

Divide this by the number of hours you work. 1:44

So let's say I work 241 days at 8 hours per day, which is 1,928 hours. 1:47

Divide this $79,200—your total expenses plus your profit margin—by the $1,928 to arrive at your approximate hourly rate. 1:55

For this example, that's $41 per hour. 2:05

Now when calculating working hours, most professionals don't include time spent on administrative work— 2:09

things like writing proposals, billing, and self-promotion because that's not strictly client work. 2:15

Other freelancers use a multiplier that's unique to the project—a creativity coefficient. 2:21

This number is a multiplier of your base rate to help you match the price you charge 2:27

with the level of creativity and difficulty of each project. 2:31

Creativity coefficients can be close to 1 for projects that are dead easy for you and stuff that you do all the time. 2:35

But as difficulty or uniqueness of the project increases, so does the coefficient. 2:42

With an hourly rate when you consider a project, you should carefully estimate the number of work hours. 2:46

You can then multiply this rate by the hours to figure out whether the client's budget at least covers your costs. 2:52

If it doesn't, you can negotiate with the client for a higher fee, propose a different solution for the project that takes less time, 2:58

talk about reducing the number of features implemented, or whatever is needed to come to a mutual agreement. 3:05

Coming up with a per project price involves roughly the same approach, but is more appropriate for freelancers who have experience. 3:11

Say product landing pages is your specialty and that over the years you've found out that it takes you 2 weeks to do it. 3:18

You calculated your baseline rate awhile back and found it to be $40 an hour. 3:25

Given these numbers and some rough calculation, we can say that you should be charging $3,500. 3:31

After doing it for awhile if another landing page comes in, you know off the top of your head that the minimum fee for this project 3:37

should be $3,500. 3:44

Without having to drill down into hours and cost, you can comfortably tell the client 3:47

that it will cost them around $4,000 for the whole project. 3:51

Per project pricing is always more attractive to clients but it comes with experience, doing this for awhile, and knowing your numbers. 3:54

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